The Myth of Gold Confiscation

Recently I have seen a few articles speculating whether President Obama would decree the confiscation of private gold holdings from US citizens. This is seen as a counter against the perceived inflation surge that many believe will wash over America and the world in years to come as a result of the huge debt load that the credit crunch has instigated. In fact, I have even seen speculations about mining companies being nationalized – even silver mining companies!

Gold confiscation is a subject that divides gold investors. Some say it won’t happen again and others say it will happen again. The one thing they tend to agree on is that they don’t want it to happen again. I wrote on this subject three years and I just want to reiterate one myth about the previous Roosevelt confiscation that needs to be buried lest anyone think a government seizure would leave you bereft of gold.

Roosevelt issued executive order 6102 in April 1933 ordering in all gold coin, bullion and certificates. One contention is that most people did not bother obeying such a directive. In my opinion, the following statement by the Roosevelt government was not bluster but largely true:

“White House Statement on Returning Gold to Federal Reserve Banks.

April 5, 1933

In the past weeks the country has given a remarkable demonstration of confidence. With the reopening of a majority of the banks of the country, currency in excess of $1,200,000,000, of which more than $600,000,000 was in the form of gold and gold certificates, has been returned to the Federal Reserve Banks.

Many persons throughout the United States have hastened to turn in gold in their possession as an expression of their faith in the Government and as a result of their desire to be helpful in the emergency.There are others, however, who have waited for the Government to issue a formal order for the return of gold in their possession. Such an order is being issued today.”

The anti-confiscation contention is that the people who were waiting for the government to issue a formal order were not for turning their gold in. As can be seen from the above release, $600m or roughly the equivalent of 30 million ounces of gold in coin and certificate had been returned to the banks prior to the executive order.

Now, it can be conceded that the people waiting for an official order may have ultimately held onto their gold, but a reading of the order suggests that illegally held gold was probably not going to happen in any great measure. The reason for this is the following section of Executive Order 6102:

“All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve bank or a branch or agency thereof or to any member bank of the Federal Reserve System all gold coin, gold bullion, and gold certificates now owned by them or coming into their ownership on or before April 28, 1933, except the following:

(b) Gold coin and gold certificates in an amount not exceeding in the aggregate $100.00 belonging to any one person; and gold coins having recognized special value to collectors of rare and unusual coins.”

Now section (b) is the text of interest. Many have focused on the numismatical portion, but I have rarely seen much said about the $100 exemption clause. At that time gold was valued at $20 per ounce. The $20 double eagle coin in circulation contained just under an ounce of gold and five of them made up $100.

What is this exemption clause in executive order 6102 saying? It is saying that each person could keep up to nearly five ounces of gold coin in their possession without fear of prosecution! At that time, the adult population of America was about 90 million. In theory, the population could have held onto 450 million ounces of gold if they had the means and will to do it (in practise, this much gold was never minted into coin).

Was there widespread illegal hoarding of gold? Milton Friedman and Anna Schwartz in their book "A Monetary History of the United States, 1867-1960," give statistics which suggest that 13.9 million ounces of gold were still in circulation in January 1934 and that only about 21.9% of the gold in circulation had been handed in.

The trouble with that statement is that it does not seem to take this 5-ounce exemption clause into account. Although we do not believe that 90 million people actually held about 5 ounces each, it would only take each adult in America to legally hold 0.15oz of gold to account for this “missing” 13.9 million ounces. Indeed, even if an attempt was made to take this 5oz exemption into account, I would consider it nigh impossible to differentiate legally held coin from illegally held coin.

How much of these 13.9 million ounces was legally held? Of course, we cannot say definitely, but it seems clear to me that even during the Great Depression, holding five ounces of gold was not an onerous task for many. How much was the average wage in America in 1933? I found a few answers by searching the Internet, but they averaged out at about $1400 per annum. That means that $100 was less than a month’s wage and although the savings rate in 1933 was one of the lowest in recent American history, we suspect many households held more than $100 in savings.

Indeed, it would only take 2.8 million adults or 3% of the adult population to hold 5oz and account for the entire 13.9 million ounces of gold. When we also consider how many probably redistributed their excess gold coins to wives, sons, daughters, parents and so on to avoid confiscation, I think we can safely conclude that illegal hoarding was not a major activity.

One may say that if Roosevelt had not included this 5oz exemption, then illegal hoarding would have happened. Perhaps it would have, but in this exemption we see Roosevelt the Socialist in action. For you see, democratic socialism has this thing about progressive taxation and I suggest the same for confiscation. Just as people will not start paying tax on their income until they have crossed their personal “allowance”, so it was with this gold exemption clause. How do you get the majority of average income voters on your side on this matter? You simply let them keep a portion of their gold and then give them the added bonus of a 57% windfall when gold is revalued to $35! How many sold their five eagle allowance at $35 instead of $20? Nobody knows for sure but that is how reflation works, you create extra dollars for people to spend.

So how would this arrested form of confiscation work if it was imposed today? If President Obama seized the gold ETFs but allowed citizens to keep five ounces per head how would that pan out? Quite easily I suspect. As it happens, five ounces of gold currently costs about $4800. If the average American wage is $40000 today, then this 5oz would form 12% of annual income. In 1933, it would have been 7%at $20 an ounce and 12% at $35 an ounce so not much of a difference even after 76 years (herein we see gold’s ability to preserve wealth across the decades).

Of course, a modern confiscation may be for different reasons than a 1930s one. The point I am trying to make is that Roosevelt signed off executive order 6102 not to prohibit ownership per se but to prohibit hoarding which is a completely different matter. The relevant portion of the executive order is:

I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section to do hereby prohibit the hoarding of gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations ..

Possessing five gold double eagles is not hoarding, gold ownership was not prohibited, gold hoarding was. Thanks to the gold standard, people were cashing in paper for gold and depleting the Treasury. But when the gold standard began to prove inconvenient to a government that wanted to reflate the economy, it had to go. So much for the gold standard holding government accountable, they just discard it when it gets in the way!

Today we have a similar situation in terms of form but not magnitude. The government wants to reflate but gold is not in the way this time. Back in 1933 you increased the money supply by 50% by revaluing gold to $35 an ounce. Today, you just devalue the dollar by debt auctions and quantitative easing. Is gold confiscation coming? I doubt it -- and even if it did, the exemption clauses of order 6102 may set a precedent for many families to hold sizable portions of gold.